With rare exceptions for those businesses with extraordinary financial strength, obtaining credit of almost any type for emerging growth or middle-market businesses, now requires guarantees by the owners with 20% or more of the equity in a company, said Kenneth H. Marks, consultant and author of The Handbook of Financing Growth. And that's applicable from startups to those with $100 million in sales, he added. Marks said the most liberal granting of credit occurred in 2006 and 2007, then the market started contracting in 2008 and it has been a tightened state ever since.

"Three years ago, you would have found credit facilities in place and if a company was pretty well run, you could negotiate out of those personal guarantees," Marks told Credit Union Times. "Just the competitive landscape at the time, a business could take a hard stand if there were multiple lenders."

For the most part, credit unions may have been able to approve loans without a personal guarantee requirement. NACUSO General Counsel Guy Messick recently penned a letter to NCUA Secretary of the Board Mary Rupp on the proposed amendment to the Regulatory Flex regulation. One issue of concern was the elimination of the exemption for personal guarantees in business lending. He argued that if a business is long standing, profitable and collateral provided has a very favorable loan-to-value ratio, "the reasonable commercial expectation of the borrower is that personal guarantees are not required."

"Banks will issue these loans all day long without personal guarantees," Messick wrote in a May 18 letter to the NCUA. "The effect of not permitting the Reg Flex credit union to do likewise is to remove the very best credits from considering credit union as lenders." The result could be unintended consequences of pushing "the super A credit from credit unions and force [it] to play exclusively in the lesser creditworthy market, creating a distinct competitive advantage for [it] and potentially more risk."

Marks said what he has heard from his bank clients is that if a loan goes bad, it falls on them to liquidate the collateral, get rid of the business and pay off the loan. The person most knowledgeable about the business is typically the owner or operator, who is needed to stick around to help with a workout, he explained. The connection is the personal guarantee.

"Generally, personal guarantees keep the owners and operators engaged with the lenders," Marks said.

From a practical perspective, guarantees are difficult to negotiate or to get much movement on unless the lender or lessor wants a company's business and unless there is competitive pressure giving the company and owner the ability to haggle for improved terms, Marks said. Negotiating these terms is done in the context of the overall credit facility or lease agreement at a time of change, he noted.

While he advises businesses on ways to navigate within the personal guarantee realm, Marks said credit unions and other lenders can benefit as well through other protection alternatives. Rather than a guarantee of payment, a guarantee of collection tends to favor a business because the arrangement typically requires the lender to first exhaust its options against the company before it can demand payment. Marks has also suggested several other tactics including limiting the scope of the guarantee to exclude recourse against a business owner's house or property, not having a spouse sign to protect assets and not agreeing to up-front liens or a pledge of the stock in the business.

Regardless of the method used, Marks said having a frank conversation with the credit union or other lender can help both sides manage risk and mitigate the liability that may be associated with or with not having a personal guarantee. This includes asking why the guarantee is even needed, which could fall anywhere ?between having an assurance that the owner is tied to the business so that the likelihood of being repaid is greater to needing more collateral or assets to make ?the loan or lease.

Meanwhile, Messick said while the waiver of personal guarantees can be obtained, even if an application is successful, the process can take up to 45 days, adding "the time to obtain waivers can kill a deal."

"The message of the board's proposal is that no credit union is capable of determining when it is prudent to waive a personal guarantee in a business loan," Messick said. "By penalizing the well-run commercial loan programs for the sins of the poor performing credit unions, the board has chosen regulatory expediency at the cost of stifling opportunities for well-run credit unions to serve members."

The Regional CUSO Alliance, a group of 15 business lending CUSOs that supports more than 400 credit unions with nearly $3 billion in commercial loans, had also weighed in on the elimination of the exemption for personal guarantees in business lending. Less than one-half of 1% of the loans serviced by RCA members has no personal guarantee, offering proof that "credit unions have exercised prudence and restraint with their authorities relative to waiving personal guarantees," wrote Bill Beardsley, an RCA member and president/CEO of the Michigan Business Connection in an April 26 letter.

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